Tuesday, April 28, 2009

ARC Tender Offer will allow employee stock-option-holders the opportunity to exchange stock options that are “under water” for options that are not.

What else would you expect from a very smart management team?

Given the tremendous fall-off in ARC’s stock price since 2007, many ARC employees, who were granted options to purchase ARC stock when ARC’s stock prices were much higher than the price-per-share ARC was recently trading at, are holding options that are “under water.” The term “under water” means that the option-to-exercise price-per-share is greater than the current trading price-per-share. In other words, would anyone (in their right mind) really want to purchase stock (via an option or otherwise) at a price that is higher than the stock is worth? Would you want to pay $25 for a stock that’s trading at $5? (If you said, “yes,” then please call me, as I have some GE stock I’d like to unload for “only” $25 per share.)

When stock options are under water – and, even worse, far under water – that isn’t a great incentive for those who hold stock options, especially employees who hold stock options.

So, what Suri did (and, I would imagine, the ARC Board of Directors had to sign-off on this) was to come up with a plan that would allow ARC-employee stock-option holders to exchange their under-water stock options for new stock options that are not under water. Great move – this gives terrific incentive for ARC-employee stock option holders to do everything they can – go at it full-bore so to speak, to improve ARC’s performance, both now and in the future.

Not all public companies take this sort of action. Some don’t do it because an exchange of this nature causes dilution to outside (non-insider) investors who own ARC stock. But, in ARC’s case, I don’t think the dilution effect will be much, and, besides, if ARC employees who take advantage of this exchange offer push very hard on ARC’s behalf and ARC’s numbers improve, they won’t be the only ones who win; ARC’s outside shareholders will, over time, win as well.

Without question, it can be very demoralizing when you see fellow team members, people you worked side-by-side with for years, terminated from the business because of a recession. The Tender Offer (stock-option exchange offer) will help, at least somewhat, to counter some of the bad news that ARC’s employees have had to deal with. This Tender Offer does show that the ARC management team “has heart.”

Finally, in the Tender Offer document filed with the SEC, ARC set May 21, 2009 as the date the exchange offer will take place (unless revised or amended). I’m wondering about the timing of that event. In April, ARC issued this press release ….. “The news release announcing the first quarter 2009 results will be disseminated on May 7, 2009 after the market close.” Two weeks after ARC releases its Q1 2009 results, the price-per-share will be set for the stock-option exchange offer, based on the price-per-share ARC is then trading at. If ARC’s Q1 2009 results disappoint large shareholders (institutional share holders and mutual funds shareholders), will that drive down the price of ARC stock? If that happens, the option-price-per-share will be set at lower dollar amount than would otherwise be the case if the stock price is driven higher by ARC’s Q1 2009 results. If I were an ARC employee benefiting from the exchange offer, I would want to see my option price-per-share set at a lower amount rather than at a higher amount, of course!

1 comment:

  1. Glad I read about this hear because I definitely didn't know it was an option to me even though I'm a current ARC employee.